Is SRP Groupe (EPA:SRP) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, SRP Groupe S.A. (EPA:SRP) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SRP Groupe

What Is SRP Groupe's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 SRP Groupe had debt of €56.9m, up from €52.4m in one year. However, it does have €74.6m in cash offsetting this, leading to net cash of €17.7m.

How Healthy Is SRP Groupe's Balance Sheet?

The latest balance sheet data shows that SRP Groupe had liabilities of €182.7m due within a year, and liabilities of €42.5m falling due after that. Offsetting these obligations, it had cash of €74.6m as well as receivables valued at €23.5m due within 12 months. So it has liabilities totalling €127.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €132.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, SRP Groupe boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, SRP Groupe's EBIT fell a jaw-dropping 98% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SRP Groupe can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SRP Groupe may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, SRP Groupe recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While SRP Groupe does have more liabilities than liquid assets, it also has net cash of €17.7m. Despite its cash we think that SRP Groupe seems to struggle to grow its EBIT, so we are wary of the stock. Even though SRP Groupe lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.